Scott Lawson
  • Scott  Lawson

    Scott Lawson

    Branch Manager
    NMLS# 312312

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    Go Ahead and Rent – See What Happens

     

    The question of renting vs. buying gets kicked around quite a bit among folks that are yet to buy their first home. The real solution is crystal clear, but it’s often not explained well—even by financial professionals. I often hear about the high cost of living in California, particularly in Sonoma County. The largest component of your monthly living expenses is and always will be—housing. The fact is a 30-year fixed mortgage @ $3,500 per month will never change (unless you change it). In year 29 it will still be $3,500. However, rent increases in our state which are limited by AB 1482 to 5% per year + the rate of inflation (CPI). Let’s say inflation is zero for illustrative purposes and to be conservative.

    Mortgage payment year 1 through 30: $3,500

    Rent payment table over the same period:

    % Increase per year5.00%
    Starting rent (year 0):$3,500
    Year1$3,675Year11$5,986Year21$9,751
    Year2$3,859Year12$6,285Year22$10,238
    Year3$4,052Year13$6,600Year23$10,750
    Year4$4,254Year14$6,930Year24$11,288
    Year5$4,467Year15$7,276Year25$11,852
    Year6$4,690Year16$7,640Year26$12,445
    Year7$4,925Year17$8,022Year27$13,067
    Year8$5,171Year18$8,423Year28$13,720
    Year9$5,430Year19$8,844Year29$14,406
    Year10$5,701Year20$9,287Year30$15,127

     

    This demonstrates the power of compounding which works well for an interest-bearing investment but works equally well when it is in the form of a liability. Rent will increase by more than 430% over the 30 year term, while the mortgage payment increases 0%–unless you change it through a refinance which could make the payment go even lower.

    Further, paying rent is in effect paying someone else’s mortgage. You are throwing money at the owner and getting no return on your investment from those payments. Remember, a portion of your mortgage payment when you own is principle, which becomes a “forced” savings account. You are building wealth over time by paying down the outstanding mortgage balance which builds equity combined with price appreciation of the home—oh, and the payment never changes—I’ll throw in the tax deduction for mortgage interest paid each year. Pro, pro, pro, pro and no cons…

    This is strictly a mortgage payment vs. rent comparison. Property taxes and homeowner’s insurance were omitted since each can vary wildly from one scenario to the next.

    Owning a home with a mortgage has excellent long-term benefits.

    Please explain to me again why renting is a good idea—I’ll wait. 😊

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    (707) 579-5411 131A Stony Circle Suite 500
    Santa Rosa, California 94954 NMLS# 312312
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